As mentioned in our May 2016 Charity & NFP Update, the draft legislative proposals to amend the Income Tax Act (“ITA”) and Income Tax Regulations (“Regulations”) to implement the Organisation for Economic Co-operation and Development’s (“OECD”) common reporting standards (“CRS”) were released on April 15, 2016 for consultation until July 15, 2016. Although the legislative proposals are extensive and contain a number of interconnected definitions, the potential impact on charities and non-profit organizations (“NPOs”) will depend on whether an entity is caught by the broad definition of “financial institution,” as currently drafted. An entity that is characterized as a “financial institution” will be required to report certain information about its non-resident account holders, as also defined in the draft provisions, to the CRA and CRA would then report that information to its counterpart in the non-resident’s jurisdiction and vice versa.
The definition of “financial institution” in proposed subsection 270(1) is four-pronged, but a charity or NPO would likely only be caught by the sub-definition of “investment entity”, also defined in subsection 270(1). Essentially, an investment entity is defined as an entity “that primarily carries on as a business one or more of the following activities or operations…trading in money market instruments…individual and collective portfolio management, or otherwise investing, administering or managing financial assets or money on behalf of other persons.” Proposed subsection 270(3) further clarifies that an entity will be “considered to be primarily carrying on as a business…if the entity’s gross income attributable to the relevant activities equals or exceeds 50% of the entity’s gross income” during a specified period. As well, the definition of “financial asset” in subsection 270(1) includes “a partnership interest,” which has the potential to raise some interesting questions considering that the recent passing of Bill C-15 has greenlit the participation of certain charitable entities in holding interests in limited partnerships. In this regard, sophisticated foundations, charitable trusts, and other large organizations that manage and generate more than 50% of their own income from investment activities may be caught by the financial institution definition and should consult their legal and accounting advisors to help determine whether they will have reporting obligations once CRS is fully implemented.
At this consultative stage of the implementation process it is not clear how CRA plans to administer these new provisions once implemented. On May 16, 2015, Canada Revenue Agency (“CRA”) published some questions and answers on its website to “give more information and tax administration perspectives about the” CRS and promised to “continue to inform the public of tax changes through its website, forms and publications, phone enquiries services and other communication channels.” The OECD itself also released “CRS-related Frequently Asked Questions” this month on its website, but neither the CRA nor OECD releases provide clear guidance on how charities and NPOs will be affected.
It is also interesting to note that the implementation of CRS has garnered significantly more attention in the United Kingdom (“UK”) than in Canada. In fact, the UK’s HM Revenue & Customs has recently released guidance on how CRS will impact charities in the UK. It remains to be seen whether the UK perspective on CRS will change following the recent referendum in support of leaving the European Union (“EU”), given that its implementation was the result of a directive from the EU. In any event, regardless of what happens internationally, the sector looks forward to seeing how CRA will administer the proposed amendments.